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In my latest book,
The Real Crash: America's Coming Bankruptcy - How to Save Yourself and
Your Country, I devote a full chapter
to the merits of the historical gold standard and reasons to reinstate it.
What I did not mention and few investors notice is that central banks are already returning to gold as the ultimate safe
haven asset.
I believe this change in policy, combined with
continued inflation of Western currencies, is creating a stable floor for the
gold price and an even brighter upside potential.
A Strategic Shift
The return to gold is unmistakably the product of a
strategic, not merely a tactical, shift in global central banking policy.
Central banks in the developed world have now altogether stopped selling
bullion. This was foreshadowed by their behavior over the past decade, when
they sold even less gold than they were permitted to under the anti-dumping
Central Bank Gold Agreements. Clearly the concern about dumping gold was out
of step with the trend. But more importantly, central banks in the emerging
markets have been buying gold by the truckload.
Since the financial crisis of '08, nations as
diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine,
Russia, Saudi Arabia, and India have led the way back to gold as a primary
reserve asset. Russia alone has added an impressive 400 tonnes
of bullion to its reserves, most of it coming from domestic purchases. Mexico
has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The
Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has
added approximately 60 tonnes, and Kazakhstan just
shy of 30 tonnes. Turkey amended its regulatory
policy late last year to allow commercial banks to count gold towards their
reserve requirements, adding over 120 tonnes to its
official reserves. And bullion imports into mainland China through Hong Kong
have been reaching all-time highs.
Finally, loyal US allies Saudi Arabia and India, in
what is sure to leave particularly bitter taste in Washington's mouth, have
been adding gold to their reserves by the hundreds of tonnes.
In short, the governments of emerging markets
recognize that the global monetary order is on the verge of a reset. These
emerging markets are the economic engines of the 21st century, and they're determined not to be
undermined by Western fiat paper.
Taking the Long View
The depth of this new strategy has been on display
throughout the precious metals correction of the past few months. Emerging
market central banks have continued to be aggressive buyers. This is very
bullish. As governmental actors, central banks seek out stability and
predictability. When they shift course, they do so only deliberately and
gradually, much like aircraft carriers. Western central banks have set a
clear course toward inflation, while emerging market banks are shifting
toward sound money.
The implications here are enormous for private
investors. We now see the biggest market participants buying the yellow metal
massively on the dips. What's more, because central banks enjoy substantial
clout in the gold market, their purchasing decisions have an outsized effect
on price. Institutional investors are coming to once again see precious
metals as a 'legitimate' form of investment. It is this positive feedback
loop that will serve to stabilize gold as it re-emerges as a reserve asset.
It's Still The One
Gold remains the bedrock of reserve holdings at
central banks, even in a world dominated by fiat currencies. Apparently, when
it comes to a paper-based global monetary system, it's easier to talk the
talk than walk the walk. Government officials the world
over, but especially in the developed world, have been quick to call
gold an anachronism - unsuitable for a modern, globalized economy. But these
same governments have never found it in themselves to sell off their
holdings, or for that matter, to surrender even a substantial fraction of
them. Those who have clamored the loudest have, in fact, behaved the most
conservatively.
The US, which has a whopping 75 percent of its
reserve holdings in gold, and the Western European countries, which have an
average of approximately 64 percent of their reserve holdings in gold, seem to believe no one should own gold - except them! It
shouldn't surprise anyone that emerging market central banks have spotted the
double standard. As they advance economically, these nations are less likely
to do what Washington tells them is right and more likely to think for
themselves. And with an average of less than 20 percent of their reserve
holdings in gold, they clearly know they have some catching up to do.
Behind the smoke and mirrors then, central banks in
the developed world are hoarders. Central banks in the emerging markets are
scramblers. Significantly, nobody is selling, only buying.
The Fiat Fantasy Meets Reality
What is causing the rush back to gold? Two words:
excess debt. Independent central banking has always been more of a dream than
a reality. Politicians knew from the beginning that they could run up the tab
and then corner central bankers into bailing them out via inflation, AKA
stealth default. Regrettably, central bankers have dutifully obliged - no
one, for example, has yet resigned in protest. Only a few have ever defied
their governments, and only for short periods.
Of course, governments throughout history have
created the conditions for their own collapse by tampering with their money
supply to pay debts. Undermining the currency means undermining the entire
economy, which lowers tax receipts and creates more debt. Soon, the
unintended consequences of the policy overwhelm its intended consequences,
and the state collapses - along with the jobs of those central bankers.
Committed, nonetheless, the central bankers are.
Valuation Insurance
Against this historical cycle, the best insurance
policy is physical gold. Those with the most of it will best weather the
coming rounds of competitive devaluation. No wonder that central banks in the
emerging markets are scrambling to play catch up to their developed-world
counterparts.
How much gold will
central banks stockpile? We cannot and do not know for sure. What we can and
do know for sure is that they have prudently decided on a strategic shift in
policy. This is creating a floor for the price of gold and a brighter future
ahead for those who are prepared for the return of sound money.
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